Business Breakdowns
· Fraser
[00:00:00] S1: Klarna had been around for a long time. Affirm had been around for a long time. But the product-market fit moment of really these — I'll call them pay in X, pay in 4, whatever it might be — these shorter-term loans didn't happen until the late 2010s. But the big moment occurred in the US when COVID hit and BNPL volumes 3x'd in a year through that 2020 period. And what was interesting is at that time, Affirm had been doing these longer-term interest-bearing loans, or monthly installment loans, with businesses like Peloton, but the pay-in-4-type phenomenon hadn't really hit the US, because Afterpay had started in Australia and Klarna had started in Europe. When COVID hit, it was actually those shorter-term loans that all of a sudden took off. Affirm actually went from being the biggest business to being one of three, and the market shares were probably actually going against them. And again, it's interesting talking to Max about that period of time, because we cast our mind back and think that must have been pretty nerve-wracking. You were the first mover in the US, but very quickly these international players started taking share. But he reflects on that point I spoke about earlier, where his philosophy was always starting with this really hard problem and then backfilling with the easier problem rather than trying to go the other way. And so while you had this big product-market-fit usage explosion in COVID in the US, since then you've seen Max and Affirm's philosophy of "we want to be able to offer everything to merchants and customers" actually come to fruition. And they ended up signing Amazon and Shopify and Costco and a bunch of these super large merchants. I think the founders just happened to be there when the business model was created.
· S0
[00:00:00] S0: And in terms of penetration, getting the US and Affirm specifically — agentic commerce may be one tailwind that will help them close the gap in terms of penetration, where in Sweden, in Europe, it's 20%. Australia might be 15%. It's much larger than what it is here in the US. So what are some of the levers or tailwinds that Affirm can ride in terms of closing the gap and growing overall penetration?
· Fraser
[00:00:00] S1: So interestingly, only 75 of the top 250 US merchants are on the Affirm platform or have the Affirm button integrated into their checkout. So there's still a lot of growth just from the enterprise sales motion of turning up to these merchants and getting Affirm integrated. Affirm now does offer a card to those customers that effectively come through the core funnel. So this is someone that has signed up for an Affirm loan through an integrated merchant. They've used the app, they've repaid a loan, and Affirm now offers this card. And the card can basically toggle between debit and credit using the Visa network. The customer can either pay now, pay later, or pay now and decide later, as they like to say. And that card lets Affirm reach in-store payments and the online merchants that aren't integrated with Affirm. So you can be shopping for furniture in store and still take advantage of a multi-month interest-bearing loan from Affirm, and that product has been very popular. So about 20% of users and GMV now comes from card, and it's still growing over 100% year on year. The mechanism is kind of the same, in the sense that Affirm is still underwriting every transaction, and interestingly, they still maintain very strong unit economics, because the card fees they earn are basically the same as what they would otherwise get on these interest-bearing loans with an integrated merchant. But what's interesting is Affirm now has all this data of where their customers shop at merchants that aren't integrated with Affirm. And so it's a great sales tactic when you walk into a new merchant and say, "Hey, our customers are already spending X million dollars with your business. We think we can drive an uplift of Y dollars to your revenue if you were to integrate us directly into your e-commerce site." That flywheel is also spinning to help that core engine of the core payments network with the direct merchant integrations.
· S0
[00:00:00] S0: Why do you think penetration isn't higher on the enterprise side? It's kind of a win-win solution. The merchant knows that conversion rates will be higher; maybe average orders will be higher too. And then consumers are also obviously happy — they're able to pay over time and have these various options. There's flexibility to it. Why hasn't penetration necessarily been higher?
· Fraser
[00:00:00] S1: It's an education process, and it also occurs industry by industry. So what do I mean by an education process? There are many businesses that just view card acceptance as a cost. How do I lower that cost? How do I have Adyen and Braintree and Stripe beat each other up so that my processing costs are as low as they can possibly be? And they don't necessarily view it as a strategic lever to drive— so it's an education process to say, integrate Affirm into your checkout. We show all these various offers. The cost to the merchant can vary considerably. For an interest-bearing loan, the MDR the merchant pays is kind of similar to what they would pay for a card transaction. But if there's a 0% loan that's merchant-funded, that can be high-single-digit MDR. And so some merchants look at that and think it's an excessive and totally unnecessary way to drive revenue. But what Affirm would say is, well, you can either do a 20% storewide sale, and every customer that turns up is getting a discount, and it's lower gross margins on all those sales. And you have a bunch of customers that otherwise would've paid full price that are now getting a discount. These 0% APR loans are a clever way to effectively discount, but do it on a personalized basis, customer by customer. And so when you think about that phased approach to discounting, particularly for a fashion business over the life of that season, maybe you start with the 0% loans to help move some volume and then end up in the 20 or 30% discount. Affirm tries to educate merchants on the strategic merits and the strategic value, but it just takes time to win those merchants. You do see it also happen industry by industry — all of a sudden, once Amazon launches Affirm, and this happened in 2020, 2021, a lot of other e-commerce players then follow very, very quickly, because they realize, "Hey, the biggest business has decided this is a valuable tool. We don't have to overthink this. Let's integrate." And so it's the ground game of going industry by industry, business by business, and educating them on the merits of the product. We would love it to be faster, but that's the process.
· S0
[00:00:00] S0: Do you have a sense of churn — maybe the traditional sense of churn, which I assume would be pretty low because it's just another option that's available at checkout? But at the same time, you can see companies, some very big like Walmart, try to do this themselves and move off of Affirm. Also notably, it cuts the other way, where Apple tried to do this — I think it was Apple Pay Later — and they sunsetted that because the underwriting side is actually very, very difficult. They went with Affirm. I think they integrated Klarna as well. So maybe talk about that side of the business, people maybe trying to build it on their own, or just overall churn for Affirm.